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Paid To Fail: Bankrupt American Airlines CEO Slated For $20 Million Severance

When I first read the headline that Honorable Judge Sean Lane had objected to the $20 million proposed “bonus” payment slated for outgoing AMR CEO Tom Horton, I was encouraged that finally, someone had pulled a (Judge) Rakoff, and objected to a settlement based on the moral principles of Justice, fairness and reason.

But alas, after further reading, I returned to my normal state of cynicism when learning of new deca-million dollar bonuses paid to corporate managers. Perched high on bench in his lower Manhattan courtroom, U.S. Bankruptcy judge Sean Lane sang the praises of the proposed AMR Corp. (parent of American Airlines) and U.S. Airways merger. All set was he to grant his necessary imprimatur when one wee issue peeked out from behind a curtain. US Trustee and bankruptcy watchdog Tracy Hope Davis had the temerity to single out for question another bogus CEO severance payment. In this case, I am referring to the announced $20 million severance giveaway to bankrupt AMR Corp. outgoing CEO Tom Horton. Ms. Davis objected to this invidiousness because it is against the law. A feature of a 2005 Bankruptcy Code overhaul specifically bars severance payments to insiders (officers and directors) of companies while under Chapter 11 bankruptcy protection “unless the compensation is applicable to all full-time employees or is less than 10 times the average severance paid to non-management employees during the same calendar year.” Unless every non-management employee got more than a $2 million severance, then under the law Horton’s deal is deemed illegal. Judge Lane, made no comment, complaint, or judgment as to the size of the proposed “golden parachute”. He merely announced it would be, in his words, “inappropriate” at this time and he would revisit the issue at some later date. Let me share my definition of “inappropriate” in this case. Why must failure once again be rewarded in a virtuous light? Mr. Horton was only named CEO on November 29, 2011, the same day AMR Corp. entered Chapter 11 bankruptcy protection. So for a mere sixteen months of toil, the entirety of which have been spent in Chapter 11 bankruptcy and the board wants to pay him $20 million. For a company teetering on insolvency Mr. Horton has been very handsomely remunerated, pulling in $3.6 and $4.2 million in 2010 and 2011 respectively. Additionally, he was paid $371,000 for his service on the board of directors in 2011. It’s funny how companies that are hemorrhaging cash and laying off workers manage to pay their directors such princely sums. I guess even all that high priced advice couldn’t keep away the boogeyman of bankruptcy. Exxon (XOM), which earns more net income in a year than AMR Corp has made in its entire corporate history, only compensates its board an average of $285,000 annually.

So Judge Sean dutifully approved the merger sans the severance bonus for Mr. Horton. Weil, Gotshal & Manges, lawyers for AMR Corp. argued that the AMR Corp was being replaced by American Airlines Group, Inc. after the merger-which technically meant it wasn’t AMR Corp. making the severance payment, therefore the bonus should be allowed. Also the payment wasn’t going to take place until after the merger was complete. Lawyers were also trying to change the nature of the payment and re-characterize it as a bonus for negotiating the merger between AMR Corp. and U.S. Airways. Apparently, he also renegotiated some union labor contracts. Getting paid some grand bonus for mergers or divestitures is ridiculous. That’s what managers are paid to do. It’s part of their job. There is nothing outstanding or heroic about it. That is just not so according to one Ellen Marcus, an employment compensation lawyer. Here’s Ellen, “The payout is in line with what other CEOs receive during mergers and…..You want to incentivize your CEO to act in the interest of shareholders if a good offer comes along.” So Ellen says unless we give Tom $20 million he will lose his focus and won’t try real hard. Ellen is wrong and is part of the cabal that perpetuates these obscenities. Mr. Horton wasn’t even a real CEO. He was but a caretaker of a failed enterprise in transition. Reality is regardless of how Judge Sean ultimately rules, after the merger the new board of directors of the combined entity is free to grant whatever largesse they care to bestow on Mr. Horton. The whole dance is but a charade. The insider cronies will figure a way to make this thing happen. The only way to stop this from happening is to complain. Equity holders are getting nearly completely wiped out under the reorganization plan. They will end up with only 3.5 percent of the new combined American Airlines Group, Inc. (which is what should and normally does happen in a proceeding like this) Do shareholders think it equitable that one person for sixteen months of effort walks off with $20 million? They should have a place at the table. Shareholders should be given the ultimate say on issues like this. Corporate governance legislation needs to give the ultimate power to the owners of the company; the shareholders. If shareholders can stop just one of these payouts and just maybe boards will commence taking notice that they cannot with impunity capriciously make awards.

It is attempted atrocities like these, piled one on top of other, that have gotten into the collective psyche of society today. Reading about another wacky corporate payout is not something I can ever get anesthetized to. Each one is just another pinprick of the injustices in our broken system of corporate governance. People rightly perceive that in corporate America, the game is rigged. Rank and file workers are the balls getting bounced around off the bumpers of a pinball machine, while insider corporate cronies dole out shareholder money for egregious bonuses using like it’s a Parker Bros. game of Monopoly. As one justification the crony filled board made mention that after the bankruptcy all of Mr. Horton’s precious options might be worthless. What about the pensions of the thousands of employees who held AMR Corp. stock? What about unsuspecting public shareholders and widows and orphans?

Many people focus on these micro structural failures in corporations and wrongly extrapolate that our entire capitalist architecture suffers systemic rot. Capitalism is inherently unequal. It is a system based on merit where people with hard work, can and do rise up and do great things. I wonder if the high powered board at AMR Corp. considered how long and hard a risk taking entrepreneur has to work to clear $20 million. Guess what happens when the small business owner enters bankruptcy. They get zero, nada, zilch. Mr. Horton is a former manager of a failed enterprise. While he is not to blame for its failure, neither is a former baggage handler or middle management employee who will walk away with nothing . Just like those employees displaced by the merger, Mr. Horton needs to go find another job …….without an extra $20 million. Injustices like these, repeated over and over again- It is the stuff of which revolutions are made.

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In the 1970′s corporations were redefined and only legally obligated to profits for shareholders. The elimination of any social obligation opened the door for abuse. In the early 80′s, we were taken off the gold standard and the upper tax tier fell from 70-80% where it had been since WWll to 35% leading to more manipulation of our country’s financial position. The effect cannot be dismissed by deductions alone, it has shifted the tax burden to those with less control and power.

This encouragement for immediate profit is irresponsible and will be our demise. The dwindling middle class’s ability to progress and prosper is now one of mere survival as the top 1% continue to pilfer the less advantaged.

We are seeing the results in our infrastructures that are reaching their age of maturity with little planning or funding for remedies. Our country has become over ridden with greed as we continue to stuff our pockets with no sign of abandonment.

The separation of the wealthy has us well on the way of becoming another third world nation. Our largest for-profit industries are Education and Healthcare where Insurance companies benefit from THEIR risk-elimination and we continue to allow for-profit education companies to mislead and in-debt our young full knowing that employment is unlikely.

the separation between middle class and the middle class has gotten too large. I don’t want to give up on our system. it is still far and away the best in the world. Shareholders need to agitate for more rights to remedy some of the inequalities. Thanks for reading and for your comment. Richard

Considering the collapse in trust in nearly all of our global financial and international institutions, the “best in the world” is not something we should shoot for. I want the best period. Capitalism is slowly unraveling and needs to be saved from itself.

On average, the compensation for executives in large corporations account for 80% of the total costs for compensation. Guess what the companies executives always cite as the reason for increasing costs? Worker compensation. Guess who they imply is at fault? The ones who take up only 20% of the costs related to compensation….the unions members. See when a company files for bankruptcy they don’t have to pony up the contracts they made with unions for compensation and benefits…but they do have to pony up the contracts they make with executives. Now that’s a free-market, right? And guess what happens when these executives risk money and make wrong decisions? They get bailed out by the very same folks who contribute to their bail out and who they blame for all costs of production….the middle-class which includes all union members. Must be nice to never have to take accountability because you always have that lazy good fer nothin’ welfare guy to blame.

I totally agree with you, Richard. I particularly like your comment that capitalism does not always equal out in the end, some make more and some make less. We normally get writers who eschew the idea that the AMR bonus in question is bad because it is like ALL other capitalist bonuses – nobody should ever get them. I’m glad you differentiated yourself from the “everybody-must-be-paid-equally-no-matter-what” liberal crowd, by making this statement.

I agree that AMR’s CEO should not get any bonus beyond a fair base salary for a person in his type of work. I don’t recommend that he get $20 an hour for his service either. There is no way that this executive earned more than $1 million annually for his short 3 years there. I would be interested in knowing how much the legal costs for AMR were and perhaps the judge ought to hold up the merger/bankruptcy exit until those costs are reduced as well.

I assume you are an American Airlines employee. Going through the dislocation of a bankruptcy and possibly losing some of your pensions is hard enough without the indignity of having a CEO pillage the company for an extra $20 million. Good luck to you and all your co-workers. Thanks for your comment and thanks you for reading my article. Richard